Commentary: A Hard Truth About Deregulationby
The public outcry following the May 11 crash of ValuJet Flight 592 was both deafening and predictable. First, there was an outpouring of grief for the 110 victims. Then, outrage. The question asked over and over again in recent weeks: How could the Federal Aviation Administration let ValuJet Airlines Inc. fly when the agency knew about safety and maintenance problems at the low-cost carrier?
The answer is simple. The FAA was doing exactly what the public wanted: It gave low-fare, low-cost startups the regulatory flexibility they needed to elbow their way into the market. More than that, the agency's philosophy of cooperating with companies it regulates is what the GOP congressional majority and President Clinton have been demanding of the rest of government. The drumbeat has been relentless: Slash regulation. Curb enforcement. Get the bureaucrats off business' back.
But this new flexibility carries a cost. Nonadversarial government oversight can work fine with companies that have the goodwill, competence, and financial resources to police themselves. It also can pave the way for some to evade the law and put the health, safety, and wallets of the public at risk. Says Massachusetts Institute of Technology Professor and expert on regulation Nicholas A. Ashford: "Accidents are waiting to happen."
COSTLY RULES. Without doubt, deregulation has great advantages. Mindless rules are costly for business and consumers. Regulation restricts competition. Many regs produce little more than paperwork. At the Environmental Protection Agency, for instance, rules often encourage properly filling out forms rather than cutting pollution. "We still need environmental protection," says Terry Davies, director of risk management at Resources for the Future, "but the system is inefficient, and we spend a lot more than we should."
For a time, the rise of ValuJet was an advertisement for the benefits of deregulation. When regulators let the company farm out maintenance, it could cut costs. That meant cheaper airfares not just at ValuJet but at competitors who slashed ticket prices to stay competitive.
It was just that kind of success that deregulators had in mind as they urged other agencies to adopt similar nonadversarial approaches. The EPA, for instance, slashed enforcement actions by 33% from the third quarter of 1994 to 1995 and has replaced tough crackdowns with "compliance assistance." Echoing the FAA's practice, the environment agency now tries to quietly work out problems with polluters instead of bringing the hammer down on them. In many cases, it works. But it may also increase the odds that some new environmental disaster will explode into the headlines. And then, as happened in 1993 when the parasite cryptosporidian contaminated the Milwaukee water supply, killing nearly 100, everyone will ask: How could the government let that happen?
The SEC is another case in point. It has been struggling to end the widespread practice of Wall Street firms offering brokers free trips and bonuses for hustling in-house mutual funds and other products. Rather than banning the practice with new rules, the SEC is nudging industry to clean up its own act by establishing a model compensation scheme. The result: A half-dozen big firms have ended some of the most abusive practices. But others have ignored the guidelines. Concedes an SEC official: "The industry as a whole has done too little, too slowly."
SNAKE OIL? This is, of course, nothing new. Congress in 1984 directed the Food & Drug Administration to expand the use of generic knockoffs of brand-name drugs. That brought drug prices down. However, the FDA failed to adequately police the new industry, and some generic makers submitted false data to get their products approved. The scandal sparked a regulatory backlash. Now, the GOP Congress is again pushing the agency toward cooperating with industry. The FDA sometimes approves drugs even though their makers haven't shown that the products actually improve a patient's health. And if Congress further relaxes industry regulations, dangerous products might reach the market.
Demanding 100% risk-protection from regulators, even as we starve their budgets and demoralize their staffs, is insane. The public wants bargain-basement air fares, but no crashes. It demands speedy approval of drugs to care for our children, but is horrified when deaths occur from their effects. Regulators and politicians walk a fine line. And it isn't easy. Perhaps the lesson of ValuJet is this: Neither safety nor economic efficiency comes without a price.